Archive for the ‘Behavioral Economics’ Category

The two most dangerous words in the English language today …

August 18, 2017

When it comes to human behavior, “studies show” are becoming “the two most dangerous words in the English language today.”

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According to Andy Kessler, writing in the WSJ

Many of the cited studies on human behavior are pure bunk.

For example:

The 270 researchers working under the auspices of the Center for Open Science spent four years trying to reproduce 100 leading psychology experiments.

They successfully replicated only 39 of the 100 psychology experiments.

A survey of 1,576 scientists published in Nature reported that “more than 70% of researchers have tried and failed to reproduce another scientist’s experiments … and more than half are unable to reproduce their own experiments.”

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What’s going on?

(more…)

Nums: 94% of profs rate themselves above average … but, don’t we all?

April 29, 2016

According to LiveScience.com

Since psychological studies first began, people have given themselves top marks for most positive traits.

While most people do well at assessing others, they are wildly positive about their own abilities.

The phenomenon is known as illusory superiority.

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Illusory superiority is everywhere

  • In studies, most people overestimate their IQ. For instance, in a classic 1977 study, 94 percent of professors rated themselves above their peer group average.
  • In another study, 32 percent of the employees of a software company said they performed in the top 5%.
  • Drivers consistently rate themselves as better than average — even when a test of their hazard perception reveals them to be below par.

Ironically, the most incompetent are also the most likely to overestimate their skills, while the ace performers are more likely to underrate themselves.

Psychologists say the illusory superiority happens for several reasons:

(more…)

Gotcha: Geez, you can’t even trust used car salesmen …

April 27, 2016

Few things are more attractive than those that are unavailable or in scarce supply.

Tell someone that they can’t have something, and they will be much more likely to desire it.

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Here’s the way at least one used car salesman plays the scarcity game …

(more…)

Gotcha: “I paid more, so it must be better …”

April 26, 2016

One of my favorite sports’ movie scenes is from “Major League”

Newly hired manager Lou Brown is chatting with the Indians’ general manager.

One of the team’s players –Roger Dorn – pulls up in a fancy ride, hops out and unloads his golf clubs.

Brown says to the GM: “I thought you didn’t have any high-priced talent.”

The GM shoots back: “Forget about Dorn, he’s just high priced.”

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Lou Brown almost fell for a common trap …

Sometimes people do perceive that higher priced products are better – even when they’re not.

They’re subconsciously using price as a “quality cue”.

Here’s some research that supports the dynamic …

(more…)

Powerball economics … and, oh yeah, about regressive taxes.

January 14, 2016

Last night’s Powerball payoff was $1.6 billion.

Even at Powerball’s ridiculous odds – 1 chance in 250 million of winning – that’s a good bet statistically, right?

Let’s go thru some math.

In econ-speak, the nominal expected value of the payoff is $1.6 divided by 250 million … about $6.

Since each PB ticket costs $2 … and $6 is way greater than $2 … that’s a good bet, right?

 

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As Mr. Miyagi would tell the Karate Kid: “Not so fast, Grasshopper”

(more…)

Gotcha: “I paid more, so it must be better …”

March 19, 2014

One of my favorite sports’ movie scenes is from “Major League”

Newly hired manager Lou Brown is chatting with the Indians’ general manager.

One of the team’s players –Roger Dorn – pulls up in a fancy ride, hops out and unloads his golf clubs.

Brown says to the GM: “I thought you didn’t have any high-priced talent.”

The GM shoots back: “Forget about Dorn, he’s just high priced.”

image

Lou Brown almost fell for a common trap …

Sometimes people do perceive that higher priced products are better – even when they’re not.

They’re subconsciously using price as a “quality cue”.

Here’s some research that supports the dynamic …

(more…)

Gotcha: Geez, you can’t even trust used car salesmen …

February 6, 2014

Few things are more attractive than those that are unavailable or in scarce supply.

Tell someone that they can’t have something, and they will be much more likely to desire it.

image

Here’s the way at least one used car salesman plays the scarcity game …

(more…)

Sell side bias, the "developer’s curse" … and ObamaCare.

December 15, 2013

President Obama is clearly perplexed on why the dogs aren’t eating the ObamaCare food.

He’s trying to give people a better “product” … and they just don’t get it.

What the heck is going on?

Well, shoving the roll-out snafus aside, much of the answer lies in good old behavioral economics.

Last week we talked “loss aversion” and the “endowment effect”.

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Today, let’s look at the “developers curse” …

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Loss aversion, the endowment effect … , and ObamaCare.

December 10, 2013

President Obama is clearly perplexed on why the dogs aren’t eating the ObamaCare food.

He’s trying to give people a better “product” … and they just don’t get it.

What the heck is going on?

Well, shoving the roll-out snafus aside, much of the answer lies in good old behavioral economics.

 

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Let me explain …

(more…)

Biz Insider: “Krugman won, austerity lost” … say what?

April 25, 2013

Yesterday, Business Insider guru Henry Blodget wrote: The Economic Argument Is Over — Paul Krugman Has Won

I haven’t been a big Blodget fan since he was run off of Wall Street for hyping internet stocks during their pre-bubble bursting run-up.

I think he’s trying to balance the scales these days … leaning far left to – he hopes – increase his odds of getting through the Pealy Gates.

The essence of his article is that the only thing wrong with the economy is a lack of adequate aggregate demand.

So, the government should keep borrowing and spending  … and things will right themselves,

The economic water level will rise to a point that reluctant CEOs will have no choice but to start hiring and building plants to meet demand.

That’s not a patently dumb notion … it’s just flat out wrong.

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Here’s what’s wrong with Blodget’s argument …

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Gotcha: You probably paid too much … especially if you’re bad at math.

April 18, 2013

Awhile ago, we reported a study that consumers almost invariably pick 33% more stuff than a 33% price discount.

Ouch.

Consumers are notoriously bad at spotting real values. Why?

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According to the Atlantic ….

  • First: Consumers don’t know what the heck anything should cost, so we rely on parts of our brains that aren’t strictly quantitative.
  • Second: Although humans spend in numbered dollars, we make decisions based on clues and half-thinking that amount to innumeracy.

More specifically, here are some more ways consumers end up paying too much …

(more…)

Gotcha: Geez, you can’t even trust used car salesmen …

February 15, 2013
Few things are more attractive than those that are unavailable or in scarce supply.
Tell someone that they can’t have something, and they will be much more likely to desire it.

image

Here’s the way at least one used car salesman plays the scarcity game …

(more…)

Gotcha: “I paid more, so it must be better …”

February 13, 2013

One of my favorite sports’ movie scenes is from “Major League”

Newly hired manager Lou Brown is chatting with the Indians’ general manager.

One of the team’s players –Roger Dorn – pulls up in a fancy ride, hops out and unloads his golf clubs.

Brown says to the GM: “I thought you didn’t have any high-priced talent.”

The GM shoots back: “Forget about Dorn, he’s just high priced.”

image

Lou Brown almost fell for a common trap …

Sometimes people do perceive that higher priced products are better – even when they’re not.

They’re subconsciously using price as a “quality cue”.

Here’s some research that supports the dynamic …

(more…)

Gotcha: Shrouding prices in mystery …

February 12, 2013
A couple of years ago, behavioral economists Xavier Gabaix and David Laibson wrote a seminal paper on the concept of “price shrouding,” and “information suppression”.

In other words, techniques that make it practically impossible fo a buyer to ascertain the real economic cost of a product.

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Here are some of the ways that sellers shroud their prices to flatten your wallet … 

(more…)

Nums: 94% of profs rate themselves above average … but, don’t we all?

February 8, 2013

According to LiveScience.com

Since psychological studies first began, people have given themselves top marks for most positive traits.

While most people do well at assessing others, they are wildly positive about their own abilities.

The phenomenon is known as illusory superiority.

image

Illusory superiority is everywhere

  • In studies, most people overestimate their IQ. For instance, in a classic 1977 study, 94 percent of professors rated themselves above their peer group average.
  • In another study, 32 percent of the employees of a software company said they performed in the top 5%.
  • Drivers consistently rate themselves as better than average — even when a test of their hazard perception reveals them to be below par.

Ironically, the most incompetent are also the most likely to overestimate their skills, while the ace performers are more likely to underrate themselves.

Psychologists say the illusory superiority happens for several reasons:

(more…)

Reluctant buyers: Reel ’em in …

February 7, 2013

In a time of uncertainty and intense competition, there are ways to close the big (and little) deals that can make or break your business..

contract

Fortune.com offered up 5 ways to overcome a climate of uncertainty and move from talk to contract.

(more…)

Gotcha: You probably paid too much … especially if you’re bad at math.

February 6, 2013

Awhile ago, we reported a study that consumers almost invariably pick 33% more stuff than a 33% price discount.

Ouch.

Consumers are notoriously bad at spotting real values. Why?

 image

According to the Atlantic ….

  • First: Consumers don’t know what the heck anything should cost, so we rely on parts of our brains that aren’t strictly quantitative.
  • Second: Although humans spend in numbered dollars, we make decisions based on clues and half-thinking that amount to innumeracy.

More specifically, here are some more ways consumers end up paying too much …

(more…)

Gotcha: The menu is playing with your mind … it’s a profit scheme.

February 4, 2013

In his book, Priceless: The Myth of Fair Value (and How to Take Advantage of It), author William Poundstone dissects the marketing tricks built into menus—for example, how something as simple as typography can drive you toward or away from that $39 steak.

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Here are some on the profit-enhancing menu tricks to watch for …

(more…)

My imagination, or did my middle class paycheck get smaller?

January 14, 2013

Even the lowest information voters should have realized by now that their paychecks have shrunk by 2% …  since the Feds didn’t renew the 2% payroll tax holiday.

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The big question for the economy as 2013 gets underway is how America will react to their smaller paychecks.

(more…)

Behavioral analytics … bad when Target does it … OK for political campaigns?

September 19, 2012

A couple of months ago Target got some bad press when it was revealed that the company was mining customers’ purchase histories to slot them into behavioral groups susceptible to tailored promotional pitches.

For example, Target identified purchases that mothers-to-be made early in their pregnancies – sometimes before they even knew they were pregnant.  Think bigger jeans, skin care lotions.

Many folks railed that it was an example of big brother invasion of privacy.

Well, guess what?

Political campaigns are using the same methods that Target was using

The modern science of politics is increasingly based on principles from behavioral psychology and data analytics.

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Campaigns today mine large data bases with mathematical algorithms that slot folks into categories and provide the basis for how people should be approached (or ignored).

According to the WSJ:

Perhaps the most valuable data in modern campaigns comes from statistical “microtargeting” models—the political world’s version of credit scores.

Campaigns gather thousands of data points on voters, culled from what they put on their registration forms, what they have told canvassers who have visited their homes in the past, and information on their buying and lifestyle habits collected by commercial data warehouses.

The campaigns then run algorithms trawling for patterns linking those demographic characteristics to the political attitudes measured in their polling.

Financial institutions run such statistical models to generate predictions about whether a given individual will demonstrate a certain behavior, like paying a bill on time or defaulting on a loan.

Campaigns do the same, only they are interested in predicting political behavior.

So it’s typical now to generate individual scores, presented as a percentage likelihood, that a voter will cast a ballot, support one party or the other, be pro-choice or antiabortion, or respond to a request to volunteer.

These scores now stick to voters as indelibly as credit scores.

And just as a bank officer won’t sign off on a loan without requesting one, a field director for a campaign won’t send a volunteer to a voter’s door without knowing the relevant number.

BTW: It’s Team Obama that’s doing most of this stuff.

Bad for Target … but OK for Obama.

Hmmm

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WSJ source: “The Victory Lab: The Secret Science of Winning Campaigns” by Sasha Issenberg

>> Latest Posts

You probably paid too much … especially if you’re bad at math.

August 14, 2012

Ac couple of weeks ago we reported a study that consumers almost invariably pick 33% more stuff than a 33% price discount.

Ouch.

Consumers are notoriously bad at spotting real values. Why?

According to the Atlantic ….

  • First: Consumers don’t know what the heck anything should cost, so we rely on parts of our brains that aren’t strictly quantitative.
  • Second: Although humans spend in numbered dollars, we make decisions based on clues and half-thinking that amount to innumeracy.

More specifically, here are some more ways consumers end up paying too much …

  1. Anchoring Effect: People are heavily influenced by the first price we see … it’s called “anchoring” …  that’s why the appliance salesman shows you the most-featured, highest-priced appliance first … it makes every other appliance seem like deal.
  2. Aversion to Extremes: People are  terrified of extremes … they don’t like buying the cheapest item … or the most costly …  they shy away from prices that appear too high or too low.For example, in one famous study, people were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80.

    Around 80% chose the more expensive beer.

    When a third beer was introduced, a super bargain beer for $1.60, 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.

    Then researchers removed the $1.60 beer and replaced with a super premium $3.40 beer.

    Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer.

  3. Shining Light Effect: Savvy restaurants, for example, design their menus to draw our eyes to the most profitable items by things as simple as pictures and boxes.Good rule of thumb: If you see a course on the menu that’s highlighted, boxed, illustrated, or paired with a really expensive item, it’s probably a high-margin product that the restaurant hopes you’ll see and consider.
  4. Dulled senses: Alcohol narrows the range of complicating factors people can hold in their heads at once.  People are easily made dumber by alcohol, time, decisions.When we’re drunk, stressed, tired, and otherwise inattentive, we’re more likely to ask and answer simple questions about buying things.

    Cheap candy bars and gum are situated near the check-out at grocery stores because that’s where exhausted shoppers are most likely to indulge cravings without paying attention to price.

  5. Concealed habits: To save some $$$, cancel recurring payments like gym memberships and subscriptions to papers and services you don’t use.Cancelling is a hassle, right?

    So what?

    Cancel that subscription.

  6. Peace of mind… allows some companies to make more money on extended warranties and service contracts than they do on their productsExcept for PCs (high prices, risk of crashes), extended warranties don’t pay-off … otherwise, why would retailers push them so aggressively?

>> Latest Posts

Profitable pricing is literally “shrouded” in mystery…

July 20, 2012

A couple of years ago, behavioral economists Xavier Gabaix and  David Laibson wrote a seminal paper on the concept of “price shrouding,” and “information suppression”.

Here’s a summary excepted from The Red Tape Chronicles

The principle is simple, and shows why cheating is rampant in our markets and why honesty is rarely the best policy.

First, a definition of shrouding:

In days gone by, price tags were simple.

An apple cost 10 cents.  A cup of coffee cost $1.

But today, the consumer marketplace is far more complicated, giving sellers the opportunity to create confusion.

Many items have follow-up costs that make the original price tag meaningless.

Computer printers are the classic example.

You might get a great deal on a printer, but if the ink is expensive, you lose in the end.

In fact, Gabaix argues that it’s impossible for consumers to intelligently shop for printers.

No consumer knows how much ink costs — the cartridges don’t come in standard sizes, the amount of ink used to print varies and ink costs are unpredictable.

That makes the true price  “shrouded” — not quite hidden, but not quite clear, either

So, it’s easy for printer companies to lowball printer price tags and overcharge for ink, enabling them to print money.

Shrouded price tags are everywhere.

The hotel website might say “$99 a night” but you know the bill will be more like $120 or $130.

Pay TV companies promise $30-a-month service, which ends up costing more like $50.

At its best, the maddening mixture of coupons, rebates, sales and fine print fees can feel like a game.

At worst, it’s being cheated.

You’d think shoppers would love a chance to buy from a store that doesn’t play these games, the way car buyers (allegedly) like shopping at no-haggle auto dealerships.

They don’t.

Shoppers hunt for the tricks that let them save money.

Stores hide booby traps that let them take money.

If a firm tries to educate consumers on tricks and traps, and tries to offer an honest product, a funny thing happens: Consumers say, “Thank you for the tips,” and go back to the tricky companies, where they exploit the new knowledge to get cheaper prices, leaving the “honest” firm in the dust.

Once you educate consumers on the right way to shop, they will seek out the lowest cost store, and that will be the one with the shrouded prices.”

“Shrouding is the more profitable strategy.”

Like it or not, hidden fees – and secret discounts – are here to stay.

>> Latest Posts

Xmas tip: Wrap it up, dummy.

December 21, 2011

For Christmas, Behavioral Economists (you know, the guys who say we’re predictably irrational), say that gifts should be carefully wrapped.

Why?

First, wrapping adds a personal touch … showing that you care enough to select the right wrapping and put some sweat equity into the present.

Second, wrapping adds to the romance (broadly defined), suspense and ritualization … you know: the shaking of the present, the slow reveal, the shouts of joy.

So, (1) do it yourself (2) don’t use newspaper or birthday wrapping (3) don’t say “I wrapped it myself” … that’ll be obvious.

Inspired by: The Behavioral Economist’s Guide to Buying Presents

>> Latest Posts

Xmas tip: for guys: gadgets … for gals: something expensive (and useless)

December 21, 2011

For Christmas,  Behavioral Economists (you know, the guys who say we’re predictably irrational), advise getting “him” a gadget and getting “her” something expensive and useless.

Excerpted from: The Behavioral Economist’s Guide to Buying Presents

Buying for a guy? Get him a gadget. Buying for a girl? Get her something expensive and useless.

University of Utah Professors Russell Belk and Laurence Coon  found three main purposes for presents: social exchange, economic exchange, or a sign of “agapic” — that would be Greek for “selfless” — love.

In the social sense, gifts were seen as a symbol of commitment.

In the economic context, men saw gifts as a way to get sex.

Women, meanwhile, tended to be more agapic, giving out of the goodness of their hearts.

But what did men and women actually want?

Belk and Coon found women care about the symbolic value, whereas men are more interested in the utility.

So women are best off getting their guy a gadget.

Men are better off going sentimental. Or extravagant.

In his book The Mating Mind, University of New Mexico Professor Geoffrey Miller explained that  the best gifts are “the most useless to women and the most expensive to men.” Flowers. Pricey dinners. Jewelery.

The less useful, the better.

Waste is the most efficient way to a woman’s heart.

Hey, I’m just reporting …

>> Latest Posts

What’s the best Xmas gift?

December 20, 2011

According to Behavioral Economists (you know, the guys who say we’re predictably irrational), the answer is cash money.

Not just generic money … cash money.

Excerpted from: The Behavioral Economist’s Guide to Buying Presents

What is the single best possible gift? Cash money.

Money is the soundest gift for one simple reason: It guarantees that the recipient gets exactly what they want.

In 1993, economist Joel Waldfogel published a study with a title that only the Grinch could love: “The Deadweight Loss of Christmas.”

Deadweight loss is the term economists use to describe the gap between what we spend on something and what it’s actually worth.

Because people rarely know exactly what their friends and loved ones want, Waldfogel decided to ask a simple, slightly uncomfortable question: How much value do we waste every year by picking the wrong holiday gifts?

He concluded that gift giving “destroys” between a tenth and a third of the value in what we buy.

In other words, if you spend $100 on that Santa-red cardigan at Macy’s, chances are whoever gets it will only value your gift between $70 and $90.

Some groups had a better gift radar than others.

Grandparents, aunts and uncles had the worst sense of what to buy.

Friends and significant others had the best.

But ultimately, cash was just more efficient.

So if you’re feeling uncertainty, don’t guess.

Do everyone a favor and go with greenbacks.

If you want to seem a tad more thoughtful, make it a gift card.

>> Latest Posts

I paid more, so it must be better …

December 1, 2011

Punch line: Sometimes people do perceive that higher priced products are better – even when they’re not.  They’re subconsciously using price as a “quality cue”.

* * * * *
Excerpted from Free Market Madness by Peter Ubel

Standard economic theory holds that consumers independently evaluate the quality of a product and its price in order to make trade-offs between quality and price. According to this theory, people will be willing to pay more for product A than B if they perceive that A is better than B.

But consider the following experiment, in which

Researchers gave 125 people a beverage that claims to increase mental acuity, and then asked them to solve a series of word-jumble puzzles.

They informed people that the regular price of the beverage was $1.89.

However, they sold the drink at a discounted price of $0.89 to half the participants, selected randomly.

The researchers found that people in the discounted-price group not only reported lower expectations of the drink than those in the full-price group, but also performed significantly worse on the puzzle task, correctly solving 20% fewer puzzles.

>> Latest Posts

Sorry, the other guy gets first dibs …

November 30, 2011

Punch line: Few things are more attractive than those that are unavailable or in scarce supply. Tell someone that they can’t have something, and they will be much more likely to desire it.

In his book Influence, Robert Cialdini describes a trick his brother employed to sell used cars that relied on the psychological power of scarcity. 

He would place an ad in the paper, inviting people to set up a time to look at the car. 

When the first person would call, he would set up a time to meet, say, one o’clock on the following Saturday.

When the second person would call, he would set up another meeting at exactly the same  time. The first customer would arrive and start looking at the car, skeptically kicking its tires, pointing out its flaws, working hard to  ratchet down the price.

Then, inevitably, the second customer would arrive and Cialdini’s brother would tell him to “wait  just a few minutes,” the other customer had first dibs on the car. 

Cialdini’s brother had brilliantly manipulated the situation to make  the car look popular and to ramp up people’s competitive juices. 

That’s why response rates go up when  “only the first five hundred respondents …” .

Excerpted from Free Market Madness by Peter Ubel

>> Latest Posts

Black Friday … it’s all psychological.

November 25, 2011

Punch line: According to the Washington Post, “far from being mass synchronized temporary insanity, the Black Friday ritual has distinct psychological underpinnings.”

1) The crowds (and scarcity) make us happy

When crowds create a sense of competition — such as when hundreds of shoppers are rushing to collect marked-down goods — they generate a different feeling … called hedonic shopping value, or a sense of enjoyment from the mere process of buying goods.

Consumers enjoy something that’s harder to get, and it makes them feel playful and excited.”

create a promotional strategy that has a high value for a limited time.”

2) We love the hunt

Black Friday is “hunting for women” … it hinge on long-standing traditions and involve pursuing a goal as a group. Whether the group actually hits its target is secondary to the fun of the chase.

The process is akin to a marathon, in that a long-distance runner is energized by the grueling trek in much the same way a Black Friday shopper thrives on long lines and frenzied grabs at cashmere sweaters.

Shoppers love to swap stories and show off their prizes at the end of the day.

“It’s ‘mission accomplished … You brag about your great deal, or about how you got the last one.”

3) It’s about togetherness

Black Friday shopping combines elements of both traditional shopping and holiday rituals.

Shoppers planned extensively for Black Friday — as they would for a holiday meal — and relish the day in part because it allows them to spend time with close friends and family.

“Sharing the shopping ritual with family members and indoctrinating children helps to ensure that the ritual is continued in the next generation.”

>> Latest Posts

How much does a ‘for sale’ home’s list price matter?

March 25, 2011

Answer: a lot … it’s the psychological effect called anchoring.

For example, researchers asked both professional real estate agents and man-off-the-street amateurs to predict the final selling price of a house.

They were all told that the current tax appraisal value of the house was $135,000.

Then, each respondent was told that the house was listed in one of four prices — ranging from $119,900 to $149,900.

The researchers found a clear positive correlation between list prices and predicted sale prices.

The amateur is responded more to the differences in list prices and the professionals — but even the pros and a $15,000 spread that can only be attributed to the differences in the list prices.

Bottom line: if you’re selling a home beach for the sky with your list price; if you’re buying a home try to ignore the list price and focus on more fundamental values like tax assessments and comparable sales

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Source: Priceless, William Poundstone, Hill and Wang Books, 2010

That menu — it’s playing with your mind … is it a profit scheme?

March 22, 2011

You bet it is …

In his book, Priceless: The Myth of Fair Value (and How to Take Advantage of It), author William Poundstone dissects the marketing tricks built into menus—for example, how something as simple as typography can drive you toward or away from that $39 steak.

1. The Upper Right-Hand Corner
That’s the prime spot where diners’ eyes automatically go first.

Restaurants often use it to highlight a tasteful, expensive pile of food.

2. Pictures

Generally, pictures of food are powerful motivators but also menu taboos — mostly because they’re used in downscale chains like Chili’s and Applebee’s.

Red Lobster ditched pics when it started trying to inch upscale

3. The “Anchor”
The highest priced item on the menu may not ever get ordered.  That’s ok.  It’s purpose is to make everything else near it look like a relative bargain.

4. In The Vicinity
The restaurant’s high-profit dishes tend to cluster near the anchor.  They’re items at prices that seem comparatively modest (when compared to the anchor).. They’re the items the restaurant really wants you to buy.

5. Columns Are Killers
It’s a big mistake for restaurants to list prices in a straight column. “Customers will go down and choose from the cheapest items.”

Consultants say to omit “leader dots” that connect the dish to the price; and to drop dollar signs, decimal points, and cents

6. The Benefit Of Boxes
“A box draws attention and, usually, orders.

When you see an item in a box, think “high margin”

7. Menu Siberia
That’s where low-margin dishes that the regulars like end up. They’re there, but relatively easy-to-miss  … or so the restaurant hopes..

8. Bracketing
A regular trick …  it’s when the same dish comes in different sizes.

Because youre never sure of the portion size, you’re tempted to to trade up … especially from small to “regular” size.

* * * * *

Excerpted from Priceless: The Myth of Fair Value (and How to Take Advantage of It), to be published in January by Hill & Wang, an imprint of Farrar, Straus & Giroux. © 2010 by William Poundstone.
http://nymag.com/restaurants/features/62498/

Reducing the propensity to work …

February 15, 2011

Parent-to-parent chat line: “I told my son he’d better find a job so he has health insurance”

I’ve heard that refrain dozens of times from parents, so I should have picked up on this earlier …

Last week, CBO Director Elmendorf dropped a bomb at a Congressional hearing when he testified that ObamaCare would reduce the “propensity to work”.

English translation: under ObamaCare, if you don’t work, no problem.  You’ll get free health care from the government.

Well, actually, it’s not free – it’s just paid for by people who do work.  You know, tax payers.

Complement that “benefit” with a couple of years of unemployment compensation and why on earth would anybody take a relatively low paying job.

Kick back.  Relax.  And if you get sick, just send the bills to 1600 Pennsylvania Ave.

Elmendorf says the new ObamaCare entitlement will reduce employment by about 800,000 workers … as the labor force shrinks by about half a percentage point .

Mr. Elmendorf said that the law won’t eliminate jobs, it will reduce “the propensity to work.”

As with any other government subsidy, people receiving “free” health care won’t have as much incentive to search for a job or work full time.

On that score, Chris Van Hollen, the ranking Democrat on the Budget Committee, asked Mr. Elmendorf a leading question about “the freedom to choose to not get a job.”

I guess Van Hollen thinks people shouldn’t be forced to work if the don’t want to.

Hmmm.

Oh, just pay whatever you feel is fair …

February 8, 2011

TakeAway: Pay-what-you-want experiments have yielded some interesting results.

When consumers pay what they feel is fair for the benefits received, there is no excess value ceded to them.

However, consumers are probably less likely to take advantage of this arrangement when the stakes are low, like in the study below.

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Excerpted from NPR, “  Can Allowing Customers to Pay as They Wish Increase Profits?by Jess Jiang, January 19, 2011

Do you pay more when you can pay what you want? Yes, according to a recent study published in the journal Science.

… a group of researchers from the University of California wanted to test how letting people pay what they want could work for other businesses. The researchers took photos of over 100,000 people on a roller coaster ride at an amusement park. Then they split people into two groups. Group A could buy the photo for a fixed price, and Group B could pay what they wanted.

The results — people who paid what they wished bought more photos— 8 times more, and these same people also spent more money per photo.

Then, the researchers added a second-dimension, charity. Half of the participants in each group were told that some of the revenue would go to charity. Although the number of sales in both group A and B remained roughly the same, purchasers who paid as they wished spent much more money when they were told charity was involved.

As for what they want people to take away from the study, the researchers point to company ethics, “our study suggests a method in which the pursuit of social good does not undermine the pursuit of profit.”

Edit by DMG

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Adults Only: A Trojan horse or a Trojan for horses ?

July 19, 2010

Hate to drag HomaFiles down to this level, but this one is too good to pass up.

Punch line: Since introducing its Magnum line of plus-size condoms,  industry leader Trojan’s market share and profits have surged.

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From Psychology Today …

Few marketers are as fortunate as condom makers, whose customers are glad to pay a premium for a product that isn’t really much bigger or better.

Trojan markets its Magnum line of condoms as “Bigger than most condoms …  designed to fit those that find normal condoms too constricting.”

Oh, yes, and then there are Magnum XL’s … an upsell version.

It’s easy to see why men fall for this particular sales pitch.

“The Magnum brand is viewed as a positive lifestyle badge and positive symbol … men are proud to show they carry a Magnum condom — the large size carries a certain cachet.”

The economics:  A box of 12 regular Trojans retails for around $5.99; a box of 12 Magnums or Magnum XLs is $7.99. That’s a 33 percent premium.

Trojan confesses that it’s hard to imagine Magnum buyers doing the math … and since Magnum condoms are only 3/10 of an inch longer than regular Trojans – and since XLs are the the same length as Magnums … all of the condoms cost about the same to make, so the Magnum’s price premium is pure profit.

As an academic observer notes: “I think the concept of having more sizes is a step forward for the industry … But you could never market them as small, medium and large, because no one would buy the small.”

Excerpted from Behavioral Economics: Monetizing the Male Ego, April 28, 2010
http://www.psychologytoday.com/blog/priceless/201004/monetizing-the-male-ego

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Factoids

Trojan, including Magnum, commands 75 percent of the condom market, with No. 2 Durex commanding 14 percent.

The company claims Magnum is the most popular condom among African-Americans, citing internal research that indicates they account for 22 percent of all condom purchases but 40 percent of Magnum purchases.

http://www.nytimes.com/2010/04/28/business/media/28adco.html?_r=1&ref=business

Next time you open a menu … spot how they’re playing with your mind.

July 15, 2010

In his new book, Priceless: The Myth of Fair Value (and How to Take Advantage of It), author William Poundstone dissects the marketing tricks built into menus—for example, how something as simple as typography can drive you toward or away from that $39 steak.

1. The Upper Right-Hand Corner
That’s the prime spot where diners’ eyes automatically go first.

Restaurants often use it to highlight a tasteful, expensive pile of food.

2. Pictures

Generally, pictures of food are powerful motivators but also menu taboos — mostly because they’re used in downscale chains like Chili’s and Applebee’s.

Red Lobster ditched pics when it started trying to inch upscale

3. The “Anchor”
The highest priced item on the menu may not ever get ordered.  That’s ok.  It’s purpose is to make everything else near it look like a relative bargain.

4. In The Vicinity
The restaurant’s high-profit dishes tend to cluster near the anchor.  They’re items at prices that seem comparatively modest (when compared to the anchor).. They’re the items the restaurant really wants you to buy.

5. Columns Are Killers
It’s a big mistake for restaurants to list prices in a straight column. “Customers will go down and choose from the cheapest items.”

Consultants say to omit “leader dots” that connect the dish to the price; and to drop dollar signs, decimal points, and cents

6. The Benefit Of Boxes
“A box draws attention and, usually, orders.

When you see an item in a box, think “high margin”

7. Menu Siberia
That’s where low-margin dishes that the regulars like end up. They’re there, but relatively easy-to-miss  … or so the restaurant hopes..

8. Bracketing
A regular trick …  it’s when the same dish comes in different sizes.

Because youre never sure of the portion size, you’re tempted to to trade up … especially from small to “regular” size.

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Excerpted from Priceless: The Myth of Fair Value (and How to Take Advantage of It), to be published in January by Hill & Wang, an imprint of Farrar, Straus & Giroux. © 2010 by William Poundstone.
http://nymag.com/restaurants/features/62498/

Pricing magic: the power of a “decoy”

July 13, 2010

In a classic pricing study, researchers assigned quality levels ranging from zero to 100 to unbranded beers (think wine ratings).

For the first test a  “regular” beers was scored a 50 and offered for $1.80 per bottle, and a premium beer – scored at 70 – was offered at $2.60 per bottle.

Survey respondents opted for the premium by about 2 to 1.

In a second test, a “cheap” beer– scored at 40 out of 100 and priced at $1.60 — was added to the mix.

Though no respondent picked the cheap beer, there was a mix change.  Suddenly, the regular — now the mid-priced beer – was picked by more people..

Hmmm.

In a third test, the cheap beer was replaced by a super-premium – scored at 75 and priced at $3.40.

Now, nobody picked the regular (which was the “low end” of the 3 picks) … only 10% picked the super-premium …. 90% picked the premium.

So, by adding a “decoy” – a product that isn’t ultimately bought but which sets a high-end price impression in people’s mind – the researchers were able to get respondents to “step up” from regular to premium – and increase the “price realization” of the regular and premium beers by 16%.

The theory of the case: “Aversion to extremes” … often, people conclude that the cheapest product is, well, a cheap product … and that the highest priced product may not deliver enough added benefits to justify its higher price.  So, the safe bet is to buy the mid-priced product.

That’s pricing magic, for sure.

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Hot waitresses get bigger tips … that’s a shocker, isn’t it ?

May 11, 2010

The overall conclusion isn’t new news … but the finding the high quality service accounts for less than 2% of tips’ variance does surprise me.

And, you gotta love when an academic says “Ugly people are not a protected class”.

Excerpted from AOL News: Survey Shows Patrons Grading Waitresses on Their Curves, May 7, 2010

Restaurant patrons might be using their tips to reward cup size more than stellar service, according to a new survey that links a waitress’s gratuities to the amplitude of her breasts.

Michael Lynn, a Cornell University professor of marketing and tourism, surveyed 374 waitresses and asked them to assess their physical characteristics, including their breast size, and evaluate whether they perceived themselves as attractive.

Those with bigger breasts, slender waists and blond hair reported receiving the best tips.

High-quality service, Lynn’s analysis concluded, had less than a 2 percent effect on tip.

Lynn suggested that restaurant managers might be wise to keep his research in mind during the hiring process, because servers who make better tips are more likely to stay at a given job.

Ugly people are not a protected class, legally,” he said. “It is not in fact illegal to hire only attractive waitresses.”

This isn’t the first time Lynn has raised eyebrows with tip-related research. In fact, he’s published dozens of studies on the subject.

Full article:
http://www.aolnews.com/nation/article/survey-waitresses-with-bigger-breasts-get-better-tips/19468878

How to tell when a waitress (oops, I meant “server”) is working you for a tip …

May 10, 2010

Dr. Michael Lynn, Cornell School of Hotel Administration says there are 12 tactics servers often use to increase their tips.

Here they are.  Three are common sense: introducing yourself, smiling, and thanking folks. 

The others vary from cute to annoying.

Next time you’re dining out make a game of it — see how many of the antics you can spot.

  1. Introduce yourself by name.
  2. Smile a lot.
  3. Personalize your appearance — wear a funny tie, hat or flower to make you stand out.
  4. Kneel down next to tables.
  5. Recommend appetizers, wine and other extra items to increase your sales — and resulting tips.
  6. Tell a joke or play a game with customers.
  7. Touch customers.
  8. Draw a picture on the check.
  9. Use credit-card tip trays.
  10. Call customers by name.
  11. Give customers after-dinner candy.
  12. Thank customers.

Think these tactics don’t work ? 

Dr. Lynn’s studies indicate that high-quality service has less than a 2 percent effect on tips.

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Source:
http://www.npr.org/templates/story/story.php?storyId=1329241

McKinsey: A marketer’s guide to applying behavioral economics

March 18, 2010

TakeAway: Marketers have been applying behavioral economics—often unknowingly—for years. A more systematic approach can unlock significant value.

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Excerpted from McKinsey Online: A marketer’s guide to behavioral economics, Feb. 2010

Long before behavioral economics had a name, marketers were using it.

“Three for the price of two” offers and extended-payment layaway plans became widespread because they worked — not because marketers had run scientific studies showing that people prefer a supposedly free incentive to an equivalent price discount or that people often behave irrationally when thinking about future consequences.

Here are four practical techniques that should be part of every marketer’s tool kit.

1. Make a product’s cost less painful 
In marketing practice, many factors influence the way consumers value a dollar and how much pain they feel upon spending it.

Retailers know that allowing consumers to delay payment can dramatically increase their willingness to buy.

One reason delayed payments work is perfectly logical: the time value of money makes future payments less costly than immediate ones. But there is a second, less rational basis for this phenomenon. Payments, like all losses, are viscerally unpleasant. Even small delays in payment can soften the immediate sting of parting with your money and remove an important barrier to purchase.

Consumers use different mental accounts for money they obtain from different sources.

Commonly observed mental accounts include windfall gains, pocket money, income, and savings. Windfall gains and pocket money are usually the easiest for consumers to spend. Income is less easy to relinquish, and savings the most difficult of all.

2. Harness the power of a default option
The evidence is overwhelming that presenting one option as a default increases the chance it will be chosen.

Defaults — what you get if you don’t actively make a choice — work partly by instilling a perception of ownership before any purchase takes place, because the pleasure we derive from gains is less intense than the pain from equivalent losses. When we’re “given” something by default, it becomes more valued than it would have been otherwise — and we are more loath to part with it.

An Italian telecom company, for example, increased the acceptance rate of an offer made to customers when they called to cancel their service. Originally, a script informed them that they would receive 100 free calls if they kept their plan. The script was reworded to say, “We have already credited your account with 100 calls—how could you use those?” Many customers did not want to give up free talk time they felt they already owned.

Defaults work best when decision makers are too indifferent, confused, or conflicted to consider their options.

That principle is particularly relevant in a world that’s increasingly awash with choices — a default eliminates the need to make a decision.

3. Don’t overwhelm consumers with choice
When a default option isn’t possible, marketers must be wary of generating “choice overload,” which makes consumers less likely to purchase.

Large in-store assortments work against marketers in at least two ways.

First, these choices make consumers work harder to find their preferred option, a potential barrier to purchase.

Second, large assortments increase the likelihood that each choice will become imbued with a “negative halo” — a heightened awareness that every option requires you to forgo desirable features available in some other product.

Reducing the number of options makes people likelier not only to reach a decision but also to feel more satisfied with their choice.

4. Position your preferred option carefully
Economists assume that everything has a price: your willingness to pay may be higher than mine, but each of us has a maximum price we’d be willing to pay.

How marketers position a product, though, can change the equation.

Marketers sometimes benefit from offering a few clearly inferior options. Even if they don’t sell, they may increase sales of slightly better products the store really wants to move.

Similarly, many restaurants find that the second-most-expensive bottle of wine is very popular — and so is the second-cheapest.

Customers who buy the former feel they are getting something special but not going over the top.

Those who buy the latter feel they are getting a bargain but not being cheap.

Sony found the same thing with headphones: consumers buy them at a given price if there is a more expensive option — but not if they are the most expensive option on offer.

Marketers have long been aware that irrationality helps shape consumer behavior. Behavioral economics can make that irrationality more predictable.

Understanding exactly how small changes to the details of an offer can influence the way people react to it is crucial to unlocking significant value—often at very low cost.

Full article:
https://www.mckinseyquarterly.com/Marketing/Strategy/A_marketers_guide_to_behavioral_economics_2536